Tuesday, April 14, 2009

As of this writing, 16 states have statutes of general applicability concerning non-compete agreements. Several other states have much more limited statutory provisions which address, among other things, no-hire covenants (Missouri), non-disclosure agreements (Washington), and profession-specific non-competes (Delaware, Illinois, New York, Massachusetts, and others).

Legislation in this area is increasing, particularly as the economy flattens and employees conduct business across state lines. Idaho and Oregon have enacted major changes to non-compete law by statute in the last year or two, while Georgia is on the cusp of major reform. Though a bill was filed in the Illinois House of Representatives concerning non-compete agreements, that legislation did not make it past a first reading and the deadline has passed for it to be introduced and called for a vote during Regular Session.

Given the expectation that legislative activity will only proliferate in this field of law, a logical question is whether a statute should be applied prospectively or retroactively. Even then, the question arises as to what prospective application means to a contract that is intended to apply at a future point in time.

The Court of Appeal of Louisiana had occasion to consider this question in Hixson Autoplex of Alexandria v. Lewis. In that case, the employee, a car salesman, signed an industry non-compete with his dealership in 2005. A year later, the Louisiana legislature carved out car salesmen from the statute permitting narrowly tailored non-competes. (Parenthetically, this appears to be the only state granting a non-compete exemption to car salesmen. It is unknown why this lobby has enough influence in Louisiana to get such a law passed). In 2008, Lewis was terminated and accepted employment with another dealership in a prohibited territory under his contract.

The court held that the change to the non-compete law substantive, not procedural, and as a default rule, substantive changes in the law apply prospectively only. The dissent rightfully points out that the relevant inquiry could be considered the time of termination, not the time the contract was entered into. After all, the covenant only takes effect upon termination, and the sina qua non of a covenant is to protect the employer after the employee is gone. By the time Lewis was fired, the statute had been changed. Neither side had anything to gain by the contract prior to this date.

Generally speaking, a legislature's expressed intent will govern. A statute may very well provide that it is intended to apply to agreements entered into on or before a date certain, and that type of clause will govern. Absent such an expression, the substantive change in the law applies prospectively. But Hixson Autoplex, and in particular the dissent, notes the inquiry regarding prospective application of a statutory amendment is not as simple in non-competes as it is in other business transactions.

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Ken Vanko is a Member at Clingen Callow & McLean, LLC in the Chicago area. For the past 15 years, he has concentrated a majority of his business law practice in the field of unfair competition and business transitions, litigating and advising clients on matters related to non-competition agreements, trade secrets, and fiduciary duties of loyalty.
He can be contacted by phone at 630-871-2600 and by e-mail at vanko[at]ccmlawyer[dot]com.

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